Corus Entertainment Inc.

Ladies and gentlemen, good morning, good afternoon, and evening. My name is Jake, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chorus Entertainment Q4 2022 Analyst and Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. Thank you. As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Doug Murphy, President and CEO of Chorus Entertainment. Mr. Murphy, you may begin your conference.

Thank you, Operator, and good morning, everyone. Welcome to Chorus Entertainment's fiscal 2022 fourth quarter and year-end earnings call. I'm Doug Murphy, and joining me this morning is John Gosling, Executive Vice President and Chief Financial Officer. Before I read the cautionary statement, I'd like to remind everyone that we have slides to accompany today's call. You can find them on our website at www.coruscant.com under the investor relations events and presentations section. Now let's move to the standard cautionary statement found on slide two. We note that forward-looking statements may be made during this call. Actual results could differ materially from forecast projections or conclusions in these statements. We'd like to remind those on our call today, in addition to disclosing results in accordance with IFRS, Corus also provides supplementary non-IFRS or non-GAAP measures as a method of evaluating the company's performance and to provide a better understanding of how management views the company's performance. Today, we will be referring to certain non-GAAP measures in our remarks. Additional information on these non-GAAP financial measures the company's reported results, and factors and assumptions related to forward-looking information can be found in Corus's fourth quarter 2022 report to shareholders and the 2021 annual report, which can be found on CDAR or in the investor relations financial reports section of our website. I will start on slide three. We end our fiscal year on a mixed note. On the one hand, we are pleased with the progress we've made in advancing our long-term strategic plan and its priorities, which until this morning's result had delivered five consecutive quarters of consolidated revenue growth. On the other hand, we now encounter a choppy advertising market with cross-currents ebbing and flowing through all advertising categories, both goods and services. This is resulting in TV advertising revenue declines evident in Q4 and expected to persist into F23. Before we further address the outlook and the details of this quarter's result, I would like to spend a moment reviewing our plan and the progress made in the past year. Our long-term growth narrative remains unchanged. We are transforming how we sell media. We are putting more content in more places, and we are growing our own content studio business. Highlights of our plan and action this past year include... The ongoing expansion of premium digital video offerings is part of our emerging streaming portfolio, now including Stack TV, the Global TV app, the Global Nose over-the-top product, Teletoon Plus, and the pending launch of Cluedo TV. The successful renewal of all our largest content supply deals with term extensions and broadened rights grants to support our growth initiatives in premium digital video. The delivery of our highest-ever recurring subscriber revenue result, given the still meaningful linear channels business, further accentuated by the strength of Stack TV. The growth of our international content licensing business, led by Nelvana and Cora Studios, and now bolstered by the addition of Waterside Studios and Aircraft Pictures. The improved financial flexibility of our balance sheet, as we termed out our bank debt with a second high-yield offering and the extension of our bank facility. and the ongoing focus on providing an attractive shareholder yield, funding our dividend, a record number of share repurchases, and progress on repayment of bank debt. As we highlighted in our Outlook update, excuse me, press release issued last month, we are in an advertising recession. All advertising across North America is being impacted, not just here at Corus. The Standard Media Index, SMI, a measurement the industry uses reported a 12% decline in the entire ad economy in the U.S. in July and a 7% decline for July and August combined when compared to those same months a year earlier. These declines, as reported by SMI, are for what they refer to as cross-media or all media, that's television, radio, digital, out-of-home, and print combined. This decrease in advertising demand is a logical result of companies trying to manage their profitability given inflation-induced cost increases and the revenue impact of supply disruptions on their businesses. One of the first choices many companies make to reduce costs is to cut discretionary spending, such as advertising. At this time, we do not know the depth nor the duration of this economic contraction. Historically, both chorus and the media industry experienced a quick decline in advertising revenues during the early stages of a recession, followed by an equally quick recovery when economic growth returns. On the Q3 call, I talked about a clear move by consumers away from the goods economy towards more service-based experiences given lifted COVID restrictions. For example, Canadians had pent-up demand for travel, and their outsized demand meant that airlines, accommodations and direct-to-consumer travel intermediaries have not returned to pre-pandemic advertising spend levels. Given that we are no longer spending all of our time at home, there are other interesting trends affecting advertising categories. Appliances, household supplies, food and beverages at home, furniture, and any items used in renovations are all seeing advertising spending down in step with reduced demand. Because Canadians are more actively enjoying their out-of-home experiences, there is understandably an increased demand for the fashion-related categories, attracting growing advertising expenditures by companies in the personal care, makeup, apparel, and accessories businesses. Supply chain issues in the automotive category persist, affecting demand throughout the year. That said, supply chains are easing. As imports across the country, container ships are offloading and inventories are on the move to warehouses for the coming holiday shopping season. This should attract advertising investments. Advertising categories that have been spending throughout the year are sustaining their momentum, such as financial services and gaming. As you can see, these many ebbs and flows are affecting the advertising market in many different ways. At Chorus, we've experienced advertising recessions and economic slowdowns before, and each time we have quickly moved to tightly manage our expenses in response. We are confident in our ability to manage these headwinds while at the same time executing our strategic plan. Moving to slide four. Our consolidated revenues were up 4% for the year at almost $1.6 billion with everything growing, including advertising, subscriber, and our content business. Total consolidated segment profit was $444 million for the year with free cash flow of $240 million. Despite the impressive progress we made in the first three quarters of the year to improve our financial flexibility, our revenue declines coupled with higher amortization of program rights in the fourth quarter resulted in year-end leverage of 3.02 times net debt to segment profit. John will take you through the detail in his remarks. On to slide five. Let me take a moment to talk about Q1. Our fall schedule is off to a great start. On Global, returning hit Survivor, 9-1-1, and CSI Vegas continue to rank as top choices for audiences, while the new series So Help Me Todd is the number one show so far this fall new to the schedule. Over on Specialty, Chorus currently owns the three most-watched overall specialty entertainment series, Alone Frozen, The Secret of Skinwalker Ranch, and, of course, Rick and Morty. New Peacock shows The Resort and Vampire Academy are proving to be audience drivers on our networks and Stack TV. And we continue to see success with our Chorus Studios originals such as Island of Brian and new series Dead Man's Curse. Over to slide six. There is a large adjustable market for video that Chorus is well positioned to benefit from in the years ahead. It includes audiences who consume our premium content on both linear and non-linear platforms. The audience trends are clear, as is the strong demand for premium video digital advertising. This market in Canada is large and growing. Canadians have more ways than ever to consume premium video content. Whether through their traditional set-top box, where two-thirds of Canadians enjoy their channel subscription, or through streaming and other non-linear on-demand services, one thing is crystal clear. Canadians love their video. In fact, in Canada, audiences are watching, on average, more than four hours of video content a day. Moving to slide seven. This year, we reached a company milestone. Recurring subscription revenue is now well over $500 million, and the combined result of our large traditional channels business accentuated by the growth of Stack TV. In Canada, when compared to the U.S., our channels bundle is a great value, with Canadians paying roughly half of what our neighbors to the south pay. We are experiencing only modest cord cutting of 3% per year, in contrast to much higher rates in the U.S., in part a function of the cost of the bundle. Our most popular specialty services have an important role in the lives of Canadians with big, highly differentiated channel brands such as HGTV, History, Showcase, Food Network Canada and W Network. And of course, our conventional network, Global TV, is a fan favourite yet again this fall, winning Monday, Tuesday and Thursday nights in core prime time and gaining momentum week over week. We are working with the BDU ecosystem to sustain the channel's business through investments in the global TV app for authenticated users and by providing premium video on demand offerings to enable binge viewing. And as noted previously, we are also working very closely with our BDU partners sharing data insights as we pursue opportunities in advanced advertising to improve targeting and effectiveness. The set-top box delivered traditional BDUs channels business is a large, recurring, and resilient one with smart industry collaboration that is enhancing the value proposition for both subscribers and advertisers alike. Over the years, investors have questioned whether we could secure future access to content, given the launch of OTT services for many of the same companies that partner with Chorus in our channels business. We have always been confident in our ability to secure premium video content, given our strong strategic relationships with the U.S. studio majors. We are pleased to share that we have done just that. In the last year, we have successfully renewed, extended, and expanded the content rights we acquire from our major content partners, such as Paramount Global, Warner Brothers Discovery, The Walt Disney Company, and NBCUniversal. Not only have we ensured the viability of our largest networks well into the next licensing regime, we have also successfully acquired new rights to pursue the many premium digital video opportunities that we've identified in our plan. So what does that mean? Over to slide eight. As you know, Chorus is the exclusive partner for Peacock in Canada, and this content drives audiences to our linear services and acquisitions on Stack TV. In recent years, we have made smart strategic moves to build a streaming portfolio, opening the door for Chorus to participate in that large, growing digital video market I just described. And today, we are pleased to make some exciting announcements. We will soon add the Disney suite of services to Stack TV, further enhancing its value proposition and driving new subscriber acquisitions. We have secured the modern library content stacks of several of our hit CBS shows on Global, such as FBI, NCIS, CSI Vegas, and Ghosts, which will also be added to Stack TV to create more value to subscribers, as well as to the Global TV app for authenticated subscribers to our channel's business inside the BDU ecosystem. This fall, we successfully rebranded Nick Plus to Teletoon Plus, transforming a popular historic chorus cartoon channel brand into a powerhouse animation OTT streaming service. To accomplish this, we secured a groundbreaking multi-year all rights deal with Warner Brothers Studios and Cartoon Network, part of Warner Brothers Discovery. Much of this expanded offering of multi-platform content will window across all of our streaming services before landing on the newest platform, Pluto TV. Our recently announced plans to launch Pluto TV, the world's leading fast, free ad-supported streaming television service in Canada, on December 1st with Paramount Global is yet another way we are putting more content in more places while providing new opportunities for advertisers. Three years ago, we launched DAG TV, then the refreshed Global TV app, followed by the Global News OTT streams, all of which are now available across multiple platforms with further expansion opportunities ahead. These, along with the addition of Teletoon Plus and the soon-to-be-launched Pluto TV, have enabled us to build a powerful streaming portfolio to participate in the rapidly growing premium digital video marketplace with the full support of our largest content partners. This is why we are so excited for the future growth prospects of our premium digital video offerings in Canada. Moving to slide nine. It's been a record year for our content business. We have made meaningful progress expanding our studio offerings with a strong slate of shows from Nelvana and Corey Studios and adding new and complementary genres with the addition of aircraft pictures and waterside studios. This expanded slate of content has resulted in increased revenues in the international marketplace with major distribution partners such as Hulu, Netflix, and others, a nod to our creative talent with big multi-season orders of our hit shows. Over to slide 10. There are three large categories of costs I would like to address before turning over to John to provide more further detail. The first category, as I've just discussed, is the smart investments we have made to renew, extend, and broaden programming deals with our U.S. content partners. These investments ensure the long-term viability of our channel's business and enable us to pursue attractive new opportunities in the fast-growing premium digital video marketplace. They also result in some programming cost inflation, but these are smart investments that secure our strategic position as a multi-platform content intermediary. The second cost category is most definitely not what I would characterize as strategic programming investments, but rather regulatory programming cost obligations. These result from the dated, regressive spending obligation that binds Chorus, while our trillion-dollar, market-capitalized, foreign-owned internet media broadcasters and competitors enjoy unfettered and unregulated access to our market. As you'll recall, our broadcast regulator decided the summer before last the course would be required to make up the approximately $50 million in Canadian production expenditures that we could not spend given the COVID-19 pandemic and related production shutdowns in 2020. This unexpected decision to make us spend more on Canadian programming in a challenging economic environment will result in ongoing margin pressure in fiscal 23 and fiscal 24 just as it has in fiscal 22. The final cost category that every company in every industry now must address is the challenging labor market as well as the additional costs as we all return to work, which of course we have described as the future of work. Our investments in flexible work arrangements, in travel to see our teams and our clients, and in the ongoing support of the well-being of our people remain paramount to our future success. And like other companies, we are seeing increases in these and related expenses as COVID-19 restrictions are relaxed. With that, I will now turn it over to John to discuss our Q4 and year-end results.

Thanks very much, Doug. Good morning, everyone. I'm starting on slide 11. As Doug mentioned earlier, the uncertain economic environment that emerged this past summer is impacting advertising demand, and that's contributing to lower consolidated revenue of $340 million. in our fourth quarter. For the year, we delivered consolidated revenue of almost $1.6 billion, and that's a 4% increase from the prior year as a result of strong revenue momentum in the first three quarters of the year. Consolidated segment profit was $56 million for the quarter and $444 million for the year. And as a reminder, in the prior year, we did benefit from over $23 million in wage subsidy and regulatory fee relief that did not recur this year. As Doug has just underscored, we are also incurring additional Canadian programming costs as a result of that negative CRTC decision in August of 2021. And this amounted to approximately $19 million for the year and $8 million for the quarter. The decision to catch up on approximately $50 million of CP underspend has been and will be a drag on our margins for F-22 through to F-24. But then it will pass. Consolidated segment profit margins were 17% for the quarter and 28% for the year. Given the current macroeconomic environment and as a result of annual impairment testing, in the fourth quarter we recorded a non-cash goodwill impairment charge of $350 million in the television segment as detailed in our MD&A for the fourth quarter and year-ended August 31, 2022. This is reflected in the consolidated net loss attributable to shareholders for the quarter of $1.82 per share and $1.19 per share for the year. Adjusting for this charge results in adjusted net income attributable to shareholders of $17 million, or $0.08 for the year. We delivered strong free cash flow of $45 million in the quarter, and that's an increase of 27% over the prior year quarter, and $240 million for the year. At current trading levels, this represents a free cash flow yield of over 50%. Net debt to second profit was 3.02 times at August 31st, 2022, and that compares to 2.76 times a year ago. As we look forward into Q1, a reminder that our free cash flow benefited from a $43.5 million distribution from a venture investment in the prior year first quarter. Now let's turn to our TV results for the fourth quarter and year as detailed on slide 12. Overall, TV segment revenues were $314 million for the quarter. That's down 6%. Well, for the year, revenues of $1.5 billion were up 3%. Although TV advertising revenue was meaningfully lower in the fourth quarter, for both the full year, TV advertising revenue grew by 2%. We also experienced positive year-over-year uptake of our streaming services and delivered a substantial increase in content revenues for the quarter and the year, reflecting the revenue diversification benefits of our portfolio of businesses. Q4, TV advertising revenue was down 14%, reflecting lower advertising demand throughout the summer months, as Doug has just discussed. Subscriber revenue increased 2% in the quarter and came in at a record $518 million for the year. That's up 4% compared to last year. This impressive result was driven mainly by increased year-over-year demand for stacked TV. As mentioned last quarter, seasonality trends were evident in the demand for our streaming services over the summer. This trend has reversed in the fall, and our focused investments in streaming subscriber acquisition strategies and the launch of our strong fall schedule has resulted in an increase in trial and paying subscribers in recent weeks. As we wrap up several weeks of premieres, and we remain focused on getting to our target of 1 million streaming subscribers. Distribution, production, and other revenue increased 4% for the quarter and 8% compared to the prior full year. This growth primarily reflects the addition of aircraft pictures in February of this year. Given macroeconomic conditions and other risks as well as a tough comparable of 16% TV advertising revenue growth in Q1 of last year, we currently anticipate some year-over-year softness in TV advertising revenue including lower television advertising revenue for the first quarter of the new fiscal. While the duration of current macroeconomic conditions is uncertain, our team remains focused on adeptly managing through the challenging period just as we have in the past and positioning us for the eventual recovery. Direct cost to sales was up 15% for the quarter and 16% for the year, and as we've noted previously, this encompasses a significant increase in amortization of program rights, which was up 13% for both the quarter and the year. The increase reflects our purposeful investment in U.S. studio output deal renewals, which provide us with extended terms and broader rights to pursue attractive digital video growth opportunities, as well as increases in costs from the ramp-up of Canadian content production driven by the CRTC's catch-up decision. which represents approximately half of the higher cost in Q4. Investments in U.S. content support our longer-term strategy to drive top-line growth and revenue diversity by expanding our offerings for both audiences and advertisers. Looking ahead to fiscal 2023, we anticipate that programming costs will grow modestly on a full-year basis, with approximately half of this driven by the CRTC's catch-up decision. We will seek to match audiences with advertiser demand whenever possible as part of our cost management efforts. Film investment amortization increased by $2 million for the quarter and $11 million for the year, and that's mainly as a result of the addition of aircraft and an increase in episodic deliveries from in-house production. Other costs of sales growth of $3 million for the quarter and $9 million for the year resulted from costs associated with certain sales initiatives which are correlated to the associated revenues. TVG&A expenses were up $9 million from the prior year quarter and $53 million for the year. And as a reminder, again, last year included $20 million of federal wage subsidy and regulatory fee relief combined for the TV segment. In addition, in the current quarter, G&A mainly reflects an increase in advertising and marketing investments to promote new program launches and stack TV, some increased people costs and expenses related to streaming, digital services, system initiatives, future of work, and other areas. Overall TV segment profit was down in the fourth quarter and year. In the fourth quarter, this was primarily a result of the contraction advertising demand, higher amortization costs for programming rights and film investments, and the G&A expense increases. TV segment profit margins were 19% in the current year quarter, 31% for the year, and that compares to 33% and 38% respectively in prior year comparable periods. As detailed on slide 13, our new platform and optimized advertising revenues continue to grow as we deploy more content in new ways and the adoption of advanced advertising solutions gains traction. New platform revenue was 12% or $33 million for total TV advertising and subscriber revenue in the fourth quarter and 10% or $142 million for the year. The continued growth reflects the disciplined execution of our strategic plan as we deploy our expanded content rights in new places and connect with audiences in new ways to drive additional sources of revenue. Optimized advertising revenue was also up significantly in Q4 and for the year, representing a new milestone of 50% or $77 million of total television advertising revenue in the quarter, and 43%, or $372 million for the year. This is an increase of 26% from the prior year quarter and 41% from the last full year, reinforcing our leadership position in the transformation of how television advertising is sold. Next, let's turn to our radio results, which are outlined on slide 14. Radio was relatively resilient in the fourth quarter despite the challenging advertising market, with the recovery continuing for the full year. Radio segment revenue is flat for the quarter and up 9% for the year, and that's a result of strong local revenues offset by the impact of broader macroeconomic conditions on national sales. Radio segment profit decreased $2.6 million to $1.7 million in the quarter and $0.8 million to $13.3 million for the year. The normal occurrence of government-related pandemic relief, along with some increased people costs and sports rights costs, are the primary drivers of increased expenses for the quarter and year. Radio segment profit margin was 7% in Q4 and 13% for the year. Over to slide 15. Looking back on the year, we are pleased with the steps we've taken to strengthen our capital structure, which included a second high-yield note offering in Q2 and the amendment and extension of our bank credit facility in early Q3. We built a strong financial foundation to support the advancement of our strategic plan while enhancing our focus on shareholder-friendly activities. Despite the macroeconomic challenges impacting advertising revenues, our goal to drive net debt to segment profit below 2.5 times over the longer term remains in focus. As a reminder, we have now paid down over $735 million of total debt since the changes to our capital allocation policy took effect in September of 2018. With the amendment to our credit facility this past year, we no longer have mandatory bank debt repayments. However, in Q4, we did continue to make optional repayments. In August, We announced an increase to the size of our normal course issuer bid to 10% of our public float, and that's up from 5% previously. This move was intended to create additional flexibility. At the end of September, we had repurchased approximately 8.6 million shares, representing 44% of the amended NCIB. And this morning, we issued a press release declaring our December 22 quarterly dividend of six-tenths per share for Class B shareholders, providing a very compelling dividend yield of 11%. As a reminder, we paid out approximately $50 million for the year, representing a dividend-payer ratio of just over 20%. These shareholder-friendly activities of paying down debt, buying back shares, and paying an attractive dividend were an aggregate $189 million for the year. And since our new capital allocation strategy was introduced back in September of 2018, this amounts to $975 million. While we manage through this challenging economic environment, as we have successfully done many times before, we do so with a stronger balance sheet and a commitment to carefully managing our expenses and our cash. We have a strong record of prudently managing our business while maintaining focus on positioning cores for the future by investing in the business, delivering, and providing attractive returns for our shareholders. We're confident in our long-term plan and in our team. With that, I will turn it back to you, Deb.